Monday, June 30, 2008

Let the Banks Go Under, Sell 10 Million Houses for $1 Each

Today's target: the notion that the collapse of the insolvent U.S. banking system would be so terrible. Really? Terrible for who? Certainly not the nation at large.

In fact the dissolution of the insolvent parts of the U.S. banking sector--yes, the investment banks, the money-center banks, the regional banks, and the savings and loans--would actually be an enormously positive development for the nation and indeed the world.

Let's start with the fact that a huge number of these lenders are insolvent. If all their bad loans, bad derivative bets and off-balance sheet losses were forced to be marked to market/liquidated to raise capital, then major bank after major bank would fold/enter bankruptcy.

And what exactly would be so bad about that? Businesses go under all the time. The truth is these banks will never ever recover the loans they wrote, so why try to prop them up with taxpayer funds? To bail out the ultra-wealthy owners of those banks, of course.

Look at this chart: most of the banks have already lost half or more of their value. And has civilization fallen because the poor owners have lost half or more of their investment in the banking sector? No.

Even at its peak of bubble hubris, the entire sector was less than 20% of the S&P stock index's value. Now it's under 10%, like it used to be. The world didn't collapse when the banking sector declined, and it won't fall when insolvent banks are ushered through the bankruptcy process.Look, WAMU has already fallen from $35/share to under $5/share. So what if it goes BK? Banks are businesses, and businesses go bankrupt all the time. United Airlines went BK and the next day employees showed up and the planes flew. When banks are liquidated/go BK, then the tellers will come to work and people will go in and do their normal banking. If a bunch of branches close, people will adapt. It will be tough on the employees let go, but how different is this than when millions of industrial and manufacturing jobs vanished over the past 20 years?

It's called creative destruction, and it's like the tide: you can't stop it, and all the government-funded sand castles in the world can't stop the tide.

That's what the Japanese government tried, and look what it got them: two decades of malaise and decline. Trying to cover up losses and keep bad debt off the books doesn't solve anything; the money's already lost.

All these absurd bailouts have one goal: enable insolvent homeowners to bail out insolvent lenders with new loans which will inevitably go bad, too. Only it will be the taxpayer who's stuck with the bill, not the banks who wrote the loan in the first place.

So let me repeat: not only should we as a nation let the banks go belly up, we should insist on it. Regulators should force every lender to declare all its assets and liabilities and mark them to market immediately. If the bank is insolvent, then let it enter bankruptcy. The money's already lost; let's just be honest about, repudiate the debt and move on.

Yes, some pension funds and 401K accounts have suffered losses due to banking sector ownership. But those losses have already be chalked; there's not much downside left, so the big losers will be the fat cats, not the pensioners whose retirement fund owns a shriveling piece of WAMU or Citicorp.

Now let's move to the other big topic: how housing costs have essentially impoverished average Americans. The number one cause of poverty in the U.S. is housing prices and rents which have risen three times faster than income since the 1960s.As David Fischer noted in The Great Wave: Price Revolutions and the Rhythm of History (page 219):

The cost of rent and real estate in the United States multipled sixfold from 1960 to 1992, while the consumer price index increased threefold. Prime real estate went up tenfold or more.Take a look:

If you go the BLS CPI page and fire up the CPI inflation calculator, you'll find that $100 in 1965 works out to be $600 in 2005. Meanwhile, housing prices rose 20-fold or more in that timeframe even as real wages dropped:

Hmm--productivity (and profits) soar, but wages actually decline, even as house prices skyrocket.

Put this all together and there is only one conclusion: to restore housing and rents to their rightful, historic levels, all 10 million distressed/foreclosed houses should be auctioned off for a $1 each. Let's give the current tenant or former homeowner first dibs, with the caveats (written into the deed) that they must maintain the property and that they have no other real estate property or assets.

(In tony neighborhoods, auction the houses for cash. The main point: get rid of them all at once, on the cheap, done in a day nationwide, and give priority to homeowners with no other real estate assets. Investors get to pick over what's left.)

Editor's note: After receiving a number of well-stated emails from readers, I now think the best approach is to auction the properties off at whatever the market will bear and give the proceeds to the bondholders. My main point remains: don't enable banks to hide bad debt if they are insolvent; it's better to face the music and get the houses into the hands of whomever will fix them/live in them/rent them, etc. Some resident is better than no resident or a criminal resident. (see reader comments at the end of the entry.)

You can massage the data however you want, but big-picture, here are the facts: there are about 50 million mortgages in the U.S., and about 10 million are either behind in payments, foreclosed, bank-owned (REO) or on the slippery slope down to one of these three endpoints. And there are some 22 million vacant/unused dwellings in the U.S.

I've published these numbers ad nauseum; please scan the archives below for the many entries which detail the statistics.

Just to recap:

1. banks/lenders are already insolvent; the money's already been lost. Trying to hide the fact or paper it over with taxpayer bailouts changes nothing.

2. the only people who will be hurt by the recognition of bank insolvency is fat cats/ the top 1-5% of citizenry.

3, housing and rents have risen three or even four times faster than wages; to reverse poverty, the historical ratio should be re-established.

4. the best way to do this is repudiate all the bad mortgage debt and sell all the distressed homes for $1 and up to whomever will restore them to liveability and live in them/rent them--no government funds required.

Now let's count the ways this will help the nation.

1. Instead of struggling to pay a bloated mortgage or skyhigh rent, millions of people will be paying to fix up an abandoned house and the property taxes. They will have a stake in their house and neighborhood and every incentive to improve it.

2. banks don't need to write mortgages for 10 million homes. No fees will be generated, and there is no investment banker needed to package the mortgages into deceptive securities. Good riddance. Loans are essentially commodities and should be as cheap as any other financial commodity.

3. Property values take a huge one-time hit. OK, so we are collectively not going to retire as millionaires based on a real estate bubble. If we are collectively paying much less for rent and mortgages, then we can start saving actual money rather than feeding off a frenzy which was doomed to collapse anyway.

4. Instead of entire neighborhoods turning into crime-ridden hellholes, people will reclaim the neighborhood one house at a time, with no government funds required.Now who would be hurt?

1. owners of lenders' stocks --mostly insiders, hedge funds, financial elites. Pension fudns who didn't exit yet will take a hit but 75% of the losses have already occured.

2. investors who bought the mortgage-backed securities and derivatives. Again: the money has already been lost due to poor risk management, and trying to obscure this doesn't help anyone.3. Wall Street and the thousands of jobs created spinning bad debt into bad securities. Many industries have been forced to shed hundreds of thousands of jobs; now it's the banking industry's turn.

The benefits and costs will be equitably divided according to housing demand and supply. Since there will be relatively few distressed homes in desirable areas like Manhattan, San Francisco, west Los Angeles, neighborhoods in Seattle, Portland, Des Moines, Austin, Boston, you name it, then these scattered homes sold at auction won't have much effect on real estate values.In areas already devastated by 40% declines and massive numbers of vacant homes, once again: the money's already been lost, and no slight-of-hand or government handout can change that. So having 200 vacant houses sold for $1+ each would be a tremendous boon in the sense that the neighborhood's slide into criminal anarchy will be halted.

Yes, current homeowners with high mortgages will be stuck with homes which are worth less than their mortgages; but that's already the case. What's changed, except the reality that the money has already been lost has finally been accepted?

The received wisdom is that allowing banks and lenders to go bankrupt would be a national tragedy. Quite the opposite: trying to prop them and the overpriced, poverty-creating housing market up is the national tragedy. The money's been lost already, so let's just admit the reality and move on. That's what bankrupcty is all about--a healthy recognition of reality.

Friday, June 27, 2008

The Art of Survival, Taoism and the Warring States

I'm not trying to be difficult, but I can't help cutting against the grain on topics like surviving the coming bad times when my experience runs counter to the standard received wisdom.

A common thread within most discussions of surviving bad times--especially really bad times--runs more or less like this: stockpile a bunch of canned/dried food and other valuable accoutrements of civilized life (generators, tools, canned goods, firearms, etc.) in a remote area far from urban centers, and then wait out the bad times, all the while protecting your stash with an array of weaponry and technology (night vision binocs, etc.)

Now while I respect and admire the goal, I must respectfully disagree with just about every assumption behind this strategy. Once again, this isn't because I enjoy being ornery (please don't check on that with my wife) but because everything in this strategy runs counter to my own experience in rural, remote settings.

You see, when I was a young teen my family lived in the mountains. To the urban sophisticates who came up as tourists, we were "hicks" (or worse), and to us they were "flatlanders" (derisive snort).

Now the first thing you have to realize is that we know the flatlanders, but they don't know us. They come up to their cabin, and since we live here year round, we soon recognize their vehicles and know about how often they come up, what they look like, if they own a boat, how many in their family, and just about everything else which can be learned by simple observation.

The second thing you have to consider is that after school and chores (remember there are lots of kids who are too young to have a legal job, and many older teens with no jobs, which are scarce), boys and girls have a lot of time on their hands. We're not taking piano lessons and all that urban busywork. And while there are plenty of pudgy kids spending all afternoon or summer in front of the TV or videogame console, not every kid is like that.

So we're out riding around. On a scooter or motorcycle if we have one, (and if there's gasoline, of course), but if not then on bicycles, or we're hoofing it. Since we have time, and we're wandering all over this valley or mountain or plain, one way or another, then somebody will spot that trail of dust rising behind your pickup when you go to your remote hideaway. Or we'll run across the new road or driveway you cut, and wander up to see what's going on. Not when you're around, of course, but after you've gone back down to wherever you live. There's plenty of time; since you picked a remote spot, nobody's around.

Your hideaway isn't remote to us; this is our valley, mountain, desert, etc., all 20 miles of it, or what have you. We've hiked around all the peaks, because there's no reason not to and we have a lot of energy. Fences and gates are no big deal, (if you triple-padlock your gate, then we'll just climb over it) and any dirt road, no matter how rough, is just an open invitation to see what's up there. Remember, if you can drive to your hideaway, so can we. Even a small pickup truck can easily drive right through most gates (don't ask how, but I can assure you this is true). If nobody's around, we have all the time in the world to lift up or snip your barbed wire and sneak into your haven. Its remoteness makes it easy for us to poke around and explore without fear of being seen.

What flatlanders think of as remote, we think of as home. If you packed in everything on your back, and there was no road, then you'd have a very small hideaway--more a tent than a cabin. You'd think it was safely hidden, but we'd eventually find it anyway, because we wander all over this area, maybe hunting rabbits, or climbing rocks, or doing a little fishing if there are any creeks or lakes in the area. Or we'd spot the wisp of smoke rising from your fire one crisp morning, or hear your generator, and wonder who's up there. We don't need much of a reason to walk miles over rough country, or ride miles on our bikes.

When we were 13, my buddy J.E. and I tied sleeping bags and a few provisions on our bikes--mine was a crappy old 3-speed, his a Schwinn 10-speed--and rode off into the next valley over bone-jarring dirt roads. We didn't have fancy bikes with shocks, and we certainly didn't have camp chairs, radios, big ice chests and all the other stuff people think is necessary to go camping; we had some matches, cans of beans and apple sauce and some smashed bread. (It didn't start out smashed, but the roads were rough. Note: if you ever suffer from constipation, I recommend beans and apple sauce.)

We camped where others had camped before us, not in a campground but just off the road in a pretty little meadow with a ring of fire-blackened rocks and a flat spot among the pine needles. We didn't have a tent, or air mattress, or any of those luxuries; but we had the smashed bread and the beans, and we made a little fire and ate and then went to sleep under the stars glittering in the dark sky.

There were a few bears in the area, but we weren't afraid; we didn't need a gun to feel safe. We weren't dumb enough to sleep with our food; if some bear wandered by and wanted the smashed bread, he could take it without bothering us. The only animal which could bother us was the human kind, and since few people walk 10 or more miles over rough ground in the heat and dust, then we'd hear their truck or motorbike approaching long before they ever spotted us.We explored old mines and anything else we spotted, and then we rode home, a long loop over rutted, dusty roads. In summer, we took countless hikes over the mountainous wilderness behind his family cabin.

All of which is to say that the locals will know where your hideaway is because they have lots of time to poke around. Any road, no matter how rough, might as well be lit with neon lights which read, "Come on up and check this out!" If a teen doesn't spot your road, then somebody will: a county or utility employee out doing his/her job, a hunter, somebody. As I said, the only slim chance you have of being undetected is if you hump every item in your stash on your pack through trailess, roadless wilderness. But if you ever start a fire, or make much noise, then you're sending a beacon somebody will eventually notice.

The Taoists developed their philosophy during an extended era of turmoil known as the Warring States period of Chinese history. One of their main principles runs something like this: if you're tall and stout and strong, then you'll call attention to yourself. And because you're rigid--that is, what looks like strength at first glance--then when the wind rises, it snaps you right in half.If you're thin and ordinary and flexible, like a willow reed, then you'll bend in the wind, and nobody will notice you. You'll survive while the "strong" will be broken, either by unwanted attention or by being brittle.

Another thing to ponder is that the human animal is a much better predator than it is an elusive prey. Goats and wild turkeys and other animals have very keen senses of smell and hearing, and it's tough to get close without them smelling you or hearing you. They're well camoulflaged, and since human sight is selected to detect movement and color, if they stay quite still we have a hard time spotting them.

In comparison, the human is a clumsy prey. It can't smell or hear very well, and it's large and not well camouflaged. Plus it's usually distracted and unaware of its surroundings. It doesn't take much to kill a human, either; a single-shot rifle and a single round of .22-long is plenty enough.If the chips are down, and push comes to shove, then what we're discussing is a sort of war, isn't it? And if we're talking about war, then we should think about the principles laid down in The Art Of War by Sun Tzu quite some time ago.

The flatlander protecting his valuable depot is on the defensive, and anyone seeking to take it away (by negotiation, threat or force) is on the offensive. The defense can select the site for proximity to water, clear fields of fire, or what have you, but one or two defenders have numerous disadvantages. Perhaps most importantly, they need to sleep. Secondly, just about anyone who's plinked cans with a rifle and who's done a little hunting can sneak up and put away an unwary human. Unless you remain in an underground bunker 24/7, at some point you'll be vulnerable. And that's really not much of a life--especially when your food supplies finally run out, which they eventually will. Or you run out of water, or your sewage system overflows, or some other situation requires you to emerge.

So let's line it all up. Isn't a flatlander who piles up a high-value stash in a remote area with no neighbors within earshort or line of sight kind of like a big, tall brittle tree? All those chains and locks and barbed-wire fencing and bolted doors just shout out that the flatlander has something valuable inside that cabin/bunker/RV etc.

Now if he doesn't know any better, then the flatlander reckons his stash is safe. But what he's not realizing if that we know about his stash and his vehicle and whatever else can be observed. If some locals want that stash, then they'll wait for the flatlander to leave and then they'll tow the RV off or break into the cabin, or if it's small enough, disassemble it and haul it clean off. There's plenty of time, and nobody's around. That's pretty much the ideal setting for leisurely thieving: a high-value stash of goodies in a remote area accessible by road is just about perfect.

Let's say things have gotten bad, and the flatlander is burrowed into his cabin. Eventually some locals will come up to visit; in a truck if there's gas, on foot if there isn't. We won't be armed; we're not interested in taking the flatlander's life or goodies. We just want to know what kind of person he is. So maybe we'll ask to borrow his generator for a town dance, or tell him about the church food drive, or maybe ask if he's seen so-and-so around.

Now what's the flatlander going to do when several unarmed men approach? Gun them down? Once he's faced with regular unarmed guys, he can't very well conclude they're a threat and warn them off. But if he does, then we'll know he's just another selfish flatlander. He won't get any help later when he needs it; or it will be minimal and grudging. He just counted himself out.

Suppose some bad guys hear about the flatlander's hideway and stash. All it takes to stalk any prey is patience and observation; and no matter how heavily armed the flatlander is, he'll become vulnerable at some point to a long-range shot. (Even body armor can't stop a headshot or a hit to the femoral artery in the thigh.) Maybe he stays indoors for 6 days, or even 60. But at some point the windmill breaks or the dog needs walking or what have you, and he emerges--and then he's vulnerable. The more visible and stringent the security, the more he's advertising the high value of his depot.

And of course guarding a high-value stash alone is problematic for the simple reason that humans need to sleep.

So creating a high-value horde in a remote setting is looking like just about the worst possible strategy in the sense that the flatlander has provided a huge incentive to theft/robbery and also provided a setting advantageous to the thief or hunter.

If someone were to ask this "hick" for a less risky survival strategy, I would suggest moving into town and start showing a little generosity rather than a lot of hoarding. If not in town, then on the edge of town, where you can be seen and heard.

I'd suggest attending church, if you've a mind to, even if your faith isn't as strong as others. Or join the Lions Club, Kiwanis or Rotary International, if you can get an invitation. I'd volunteer to help with the pancake breakfast fundraiser, and buy a couple tickets to other fundraisers in town. I'd mow the old lady's lawn next door for free, and pony up a dollar if the elderly gentleman in line ahead of me at the grocery store finds himself a dollar light on his purchase.

If I had a parcel outside town that was suitable for an orchard or other crop, I'd plant it, and spend plenty of time in the local hardware store and farm supply, asking questions and spreading a little money around the local merchants. I'd invite my neighbors into my little plain house so they could see I don't own diddly-squat except some second-hand furniture and a crappy old TV. And I'd leave my door open so anyone could see for themselves I've got very little worth taking.

I'd have my tools, of course; but they're scattered around and old and battered by use; they're not shiny and new and expensive-looking, and they're not stored all nice and clean in a box some thief could lift. They're hung on old nails, or in the closet, and in the shed; a thief would have to spend a lot of time searching the entire place, and with my neighbors looking out for me, the thief is short of the most important advantage he has, which is time.

If somebody's desperate enough or dumb enough to steal my old handsaw, I'll buy another old one at a local swap meet. (Since I own three anyway, it's unlikely anyone would steal all three because they're not kept together.)

My valuable things, like the water filter, are kept hidden amidst all the low-value junk I keep around to send the message there's nothing worth looking at. The safest things to own are those which are visibly low-value, surrounded by lots of other mostly worthless stuff.

I'd claim a spot in the community garden, or hire a neighbor to till up my back yard, and I'd plant chard and beans and whatever else my neighbors suggested grew well locally. I'd give away most of what I grew, or barter it, or maybe sell some at the farmer's market. It wouldn't matter how little I had to sell, or how much I sold; what mattered was meeting other like-minded souls and swapping tips and edibles.

If I didn't have a practical skill, I'd devote myself to learning one. If anyone asked me, I'd suggest saw sharpening and beer-making. You're legally entitled to make quite a bit of beer for yourself, and a decent homebrew is always welcome by those who drink beer. It's tricky, and your first batches may blow up or go flat, but when you finally get a good batch you'll be very popular and well-appreciated if you're of the mind to share.

Saw-sharpening just takes patience and a simple jig; you don't need to learn a lot, like a craftsman, but you'll have a skill you can swap with craftsmen/women. As a carpenter, I need sharp saws, and while I can do it myself, I find it tedious and would rather rebuild your front porch handrail or a chicken coop in exchange for the saw-sharpening.

Pickles are always welcome in winter, or when rations get boring; the Germans and Japanese of old lived on black bread or brown rice and pickled vegetables, with an occasional piece of dried meat or fish. Learning how to pickle is a useful and easy-to-learn craft. There are many others. If you're a techie, then volunteer to keep the network up at the local school; do it for free, and do a good job. Show you care.

Because the best protection isn't owning 30 guns; it's having 30 people who care about you. Since those 30 have other people who care about them, you actually have 300 people who are looking out for each other, including you. The second best protection isn't a big stash of stuff others want to steal; it's sharing what you have and owning little of value. That's being flexible, and common, the very opposite of creating a big fat highly visible, high-value target and trying to defend it yourself in a remote setting.

I know this runs counter to just about everything that's being recommended by others, but if you're a "hick" like me, then you know it rings true. The flatlanders are scared because they're alone and isolated; we're not scared. We've endured bad times before, and we don't need much to get by. We're not saints, but we will reciprocate to those who extend their good spirit and generosity to the community in which they live and in which they produce something of value.
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"In the year of Uzziah's death, the Lord commissioned the prophet (Isaiah) to go out and warn the people of the wrath to come. "Tell them what a worthless lot they are." He said, "Tell them what is wrong, and why and what is going to happen unless they have a change of heart and straighten up. Don't mince matters. Make it clear that they are positively down to their last chance. Give it to them good and strong and keep on giving it to them. I suppose perhaps I ought to tell you," He added, "that it won't do any good. The official class and their intelligentsia will turn up their noses at you and the masses will not even listen. They will all keep on in their own ways until they carry everything down to destruction, and you will probably be lucky if you get out with your life."

Isaiah had been very willing to take on the job — in fact, he had asked for it — but the prospect put a new face on the situation. It raised the obvious question: Why, if all that were so — if the enterprise were to be a failure from the start — was there any sense in starting it? "Ah," the Lord said, "you do not get the point. There is a Remnant there that you know nothing about. They are obscure, unorganized, inarticulate, each one rubbing along as best he can. They need to be encouraged and braced up because when everything has gone completely to the dogs, they are the ones who will come back and build up a new society; and meanwhile, your preaching will reassure them and keep them hanging on. Your job is to take care of the Remnant, so be off now and set about it."

Mr. Doran concluded:Yourself, Mish, Michael Panzer, et al, are perhaps well compared to Isaiah serving the "Remnant". Seems to be a valid view to me.

If the parameters in the Pareto distribution are suitably chosen, then one would have not only 80% of effects coming from 20% of causes, but also 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on (80% of 80% is 64%; 20% of 20% is 4%, so this implies a "64-4 law"). "

That leaves about 220 million Americans between 14 and 75 years of age. 4% of that number is 8.8 million. So the critical number for the Remnant in the U.S. appears to be about 9 million people.

In other words, when 9 million people start leading (4%), then 140 million (64%) will follow. Once those 150 million are moving in the same direction, then they will collectively be an irresistable force for positive change.

As the essay so brilliantly describes, members of the Remnant are not on the pulpit or writing for the Mainstream Media; they are unpublicized, unnoticed, perhaps viewed as outsiders by those around them, perhaps not. But their influence is generated by their action and example, not preaching or cajoling.

I believe most of you are in the Remnant simply by virtue of being part of this little (unpublicized, zero-marketing budget) online community of readers, contributors and correspondents. (Currently over 50,000 unique visitors a month and about 120,000 visits a month. I think Mish receives over a million visits a month. Good on ya, Mish!)

Many of you are doing real work in the real world. Don E. raises chickens in Maine, David V. has Yukon gold potatoes in the ground up north, and Noah Cicero is pursuing permaculture in Ohio. (Note on gender: many other readers doing similar work happen to be female, for instance, Freeacre, who we'll hear from in a moment.)

On the financial front, frequent contributor Harun I. has written about how to hedge yourself against various financial risks, and about becoming a more successful investor--nost recently in this essay The Principles of Trading Also Apply to Life (Harun I., June 19, 2008)

If you glance through the 2008 and 2007 Readers Journal archives, you will find dozens of amazing essays by readers who to the best of my knowledge do not occupy positions of influence in government or the media (except for Protagoras).

Given the government's abysmal non-response to the growing financial and energy crises (for instance, Oil Woes Fail to Stir Leadership in Congress WSJ), then I conclude the 9 million will have to lead government, not vice versa.

Note that the Remnant is not enaged in any one pursuit; smart people are just doing what they think is right and good, which includes being skeptical of the received "wisdom" of the media and government pronouncements/propaganda, trying to avoid the financial vortex which is pulling down the non-elites (and maybe a few elites, too), living lighter, cheaper, better lifestyles away from the stomping masses of the Consumption Is Our True God mainstream, working to improve the soil of a patch of earth, and a thousand other projects and interests.

If anything characterizes the Remnant, it is skepticism, a disdain for pomp and aggrandizement, and an awareness that doing with less is actually a happier, more fulfilling life than Always Chasing Bigger and More in the Public Eye.

For one example of how this works--first at the local level, which then influences the region, then the state and eventually the nation--let's turn to Freeacre in Oregon:

"It's nice to read your essay on permaculture and community gardening. I forwarded it to our city manager. Last week I attended a town meeting where we were to pick some goals and prioritize them, etc. I wrote down that I'd like to see our community gear up for economic collapse by localizing our food supply and ride sharing, etc, to help people on their commutes to work. I suggested community gardens, a tool bank, etc. Surprisingly, a bunch of people agreed with me and put me on a committee to hire the next city planner! So, something must be changing in the popular consciousness... (emphasis added, CHS)

We live in Central Oregon at 4,200 ft. altitude. Our garden is situated on 30 ft. of volcanic ash. We have almost no organic stuff in the "soil" except pine needles, which are acidic. No worms - they would starve to death. And, you can only count on 30 nights a year that don't freeze. To say the least, it is tough to grow stuff here. We have to heat our greenhouse and cover our garden with thermal blankets at night. And, water frequently because it is also a desert.

But, despite that, we grew almost all of the vegetables that we ate last fall and winter. We have great luck with snow peas, Chinese peas, snap peas, carrots, beets, lettuce, onions, garlic, kale, and Swiss Chard outside, and tomatoes, summer squash, pole beans, cucumbers, and green peppers in a little greenhouse.

What is also a great help is chickens. We love our chickens. They give us great eggs and are very fun and relaxing to observe and live with. I would never have believed that I could look forward to my edition of "Backyard Poultry" as much as I used to like to read "Newsweek." What a laugh.When the trucks stop rolling, we will probably start to keep rabbits, too, for protein. I can't eat a lot of carbs. Bad for me. Maybe even guinea pigs to feed to the dog. Sounds horrible, doesn't it? But, we've got a half St. Bernard/half Tibetan Mastiff. They can't eat dandelions.

We need to re-think so much. Right now, I'm looking into where the hand pumps went that the state parks used to have, since they've been replaced with electric ones. There must be a pile of them somewhere. If (when) the electricity fails, it's going to be hell getting water from the well without a hand pump - in the winter.

Don E. recently checked in with this report from Maine:

I have looked about me here in Maine and wondered what my tribe will be. i agree that they will emerge. we joined mofga, the oldest organization in the country for organic living, and in surveying what their network looks like maine comes off as a very sane place. redneck to a large part, but also a lot of industrious hippy-types raising goats and crops. a very interesting place. the watchword seems to be 'lisa'; low impact sustainable agriculture. it really is amazing how big the movement to grow local food without chemicals is in this state. my hope, slightly tongue in cheek, is that new hampster, vermont and maine will break off into a new nation with a regional gov't that looks more toward canada than south. "

Thank you, U. Doran, Freeacre and Don, for this important topic and these "on the ground" reports. Also, thank you, Stephen D., for recommending Reinventing Collapse, yesterday's topic. Good on ya all.

Apropos healthy skepticism, here is my short dismantling of the ceaseless MSM propaganda on how horribly unaffordable food is in the U.S. and how if you're poor then fast-food is your cheapest source of "nourishment"-- posted in What's For Dinner at Your House:CHS kitchen-test note on Charros-Black Bean Chili: I bought the ingredients at one of the local "Mexican" markets which cater to the Hispanic population. The total cost was:1 pound black beans: $1.192 medium onions: $ .36 ($.33/pound)garlic: $ .15 (5 heads for $1.30)jalapeno chiles: $ .201 can tomatoes: $1.00oil, cilantro, etc.: about $ .30Total: $3.20

For 6 servings, that's $.53/serving. Add $2 for 4 dozen tortillas, slice up six medium raw carrots (12 oz.) for crunch and vitamins, and that brings it up to $5.60 or $ .93/serving (even less if you get 8 servings).

If you wanted to add a pound of meat, and you buy on sale, then add another $3.40 or so for either beef (lean cut) or ground turkey. That boosts the cost to about $9.00 or $1.50 per serving for a hearty, protein- and fiber-rich meal.

Compare that to the cost of a supposedly "cheap" (and horribly unhealthy) fast-food "value" meal of burger, fries and a sugar-bomb soda for six: in California, over $30. And yet all we hear is how "poor people" (like me?) "can't afford healthy food." What rot! 93 cents beats the heck out of any fast-food garbage, it's easy to make and the ingredients are readily available virtually anywhere.

By his own account, "entertaining and thought-provoking" were his goals for the book, and he has succeeded very admirably. I can recommend the book wholeheartedly, even as I respectfully disagree with some of his conclusions.

Here is my analysis of where and how he goes astray.

1. The collapse of the USSR was a political act; the USA is facing a resource-depletion-financial crisis. Now a financial collapse (K-Wave "winter," or the repudiation of all debts, public and private) certainly could lead to political collapse, but that is by no means set in stone.

The cultural and structural differences between the USSR and the USA are significant, and if Orlov had been an anthropologist his book might have drawn somewhat less sensationalist distinctions. His primary thesis is that the Soviet Union was actually better prepared to weather collapse than the U.S., but I think he missed this critical difference: Russia and the other constituent states of the former USSR were resource-rich.

The delivery system for what I call the FEW Essentials (food, energy, water) was decrepit and inefficient, but there was plenty of oil, natural gas, wheat (Ukraine), water and know-how in a relatively well-educated citizenry. The problems were all basically political in nature: a failed Nanny State could no longer deliver the goods and services it had controlled.

The U.S. will be dealing with an entirely different set of problems: systemic financial crisis/collapse, and shortages in resources that were once abundant: food, energy and water (at least in the West). Those limitations in resources present problems beyond mere political corruption and incompetence, though we have still have an abundance of those. In other words, if the U.S. faces a bigger challenge, it's because the problems are far deeper than just political structure.

Here in the U.S., the political problem is our system's inability to tackle long-term problems with any sort of foresight and rationality, but that does not necessarily lead to political collapse. The USSR was a Nanny State par excellence--you needed political approval to go to college, to take a job, to buy food, to move to another city--your entire life was governed by the State, which "promised" to take care of you in a fashion captured perfectly by the wry Soviet-era joke, "We pretend to work and they pretend to pay us."

The U.S. has certainly evolved into a Nanny state in many ways, but we should be careful not to exaggerate this weakness. Many people in the U.S. are still quite capable of doing things for themselves, including organizing their community around goals the government is either botching or ignoring. As the economy tanks and tax revenues dry up, and government at every level spends more and more of its revenues paying interest on old and new debts, then the path of least resistance for government is not collapse but irrelevance.

Once people realize the Gravy Train has tumbled off the tracks and the government no longer has the money to throw tens of billions at every "problem," then they'll eventually stop trying to get blood from a turnip, i.e. demanding something from the gummit which the gummit no longer has--"free" money.

Recall that much of the U.S. government spending depends on borrowing trillions of dollars from willing folks. Once they're no longer willing, or no longer have the money to lend, that money dries up. And then so must Federal spending. No more "free" money is made worse by the inconvenient truth that we have to pay interest on all the trillions we've already borrowed, and that's running into the hundreds of billions even now with interest rates at generational lows.

When the U.S. Nanny State becomes financially unviable, as it surely will when we can no longer borrow another couple trillion dollars from foreign creditors every year or two, then many people will be distraught that the government can't pay their bills or give them "free" money. But that doesn't necessarily mean the government simply vanishes into thin air; it could still ration gasoline and food, as it did rather successfully in World War II, or fix prices and wages as it did in the Korean War; government can still regulate the economy at a very low cost.

What will go away in the U.S. is the trillions of dollars expended on entitlements like Medicare and boondoggles like Homeland Security. When the money dries up, so do taxes, and the only bills the Federal government really really has to pay is Defense and related costs, its own bloated payroll and interest on the National Debt, which will be growing by leaps and bounds as interest rates rise. But issuing regulations is very cheap, and so I would expect government to continue doing what is cheap and easy, i.e. regulate, and slowly exit what's expensive, i.e. entitlements and government programs which cost hundreds of billions (check the Dept. of Overseas Wars for just one example.)

Another key difference between the USSR and the USA is that if you stood up and confronted the government there, you were taken away; here, you're a hero/heroine. That is not to say you can't or won't be dragged off if you challenge the government here, but let's not be coy--if you do so here, you're widely considered a hero/heroine.

From Daniel Ellsberg on down, people who work around the government or protest its over-reach are supported and encouraged in the U.S., which continues to have an increasingly unmanagable/irrepressible free press (blogosphere and the Web).

Furthermore, despite being doped up, stressed out and brainwashed by the TV/mass-media, Americans still retain a vestigal distrust of elites and governmental tyranny/over-reach. The entire anti-gun-control issue is fundamentally an expression of this skepticism of an overly controlling State and the elites who run it.

For every American who will whine when their gummit check fails to arrive, there will be another American who declares, "good riddance." I am not an expert on the former Soviet Union, but from what I have read (these three volumes are a good start: The Gulag Archipelago: 1918-1956 , The Gulag Archipelago 2 and Gulag Archipelago 3 ), the cultural traits which enabled people to survive such brutality and repression were endurance and fortitude.

Foreigners have long had a weakness for overestimating the weakness of average Americans; as far back as the Revolutionary era, it was commonly held that Americans were too rich and lazy to sacrifice much or be much of a threat; and so the bloody footprints left on the snow by Washington's ragtag soldiers was a nasty surprise to the Empire. (The British Empire, that is.)

Ditto when the Japanese expected the U.S. to quickly negotiate a peace advantageous to Japan after Pearl Harbor and the U.S. defeats in the Phillipines and elsewhere. But instead, they were treated to U.S. suicide attacks at the pivotal Battle of Midway (40 torpedo planes lost out of 41, a suicidal attack without fighter cover) and the subsequent loss of the cream of their Navy, four aircraft carriers sunk within 10 minutes by the gutless, complacent, lazy, etc. Americans. From that moment in, Japan was reduced to a defensive war they were destined to lose.

Ditto when Hitler famously declared the U.S. a "mongrel nation," and we all know how that turned out. So perhaps the people of the former USSR and the seemingly fat, lazy Americans have a bit more in common than Mr. Orlov detects. Which brings us to another key difference:

2. The Soviet Union was not a nation of immigrants; the U.S. is and has been since its inception. Even the Native Americans came from somewhere else, albeit a long time ago (though 12,000 years is merely a blink in geological time). Now on the surface immigration is driven by a number of things: hunger, poverty, desire for religious freedom, etc. But fundamentally it is a form of natural selection. Among any group of people, there wil be some who look around at the poverty, corruption, hopelessness and lack of opportunity for non-elite people and decide the best way to change their lives is to leave.

Inevitably, many people don't rouse themselves to that challenge, and they stay put. Who would you bet on when the chips are down, the folks that sweated blood and took huge risks to claw their way into a better place, or those who hung back?

I know a lot of immigrants, from Asia, Europe, Latin America, the Caribbean, etc., and I believe it is fair to say that the average immigrant of any generation did not come here seeking a Nanny state; that was often the motivation for them to leave, along with political and religious repression, poverty, endemic corruption, venal elites, and so on.

If times get tough here, as they most certainly will, then some recent immigrants will pull up stakes and return to their nation of origin. Others will guts it out; still others will have no choice but to stay. In any event, immigrants tend to understand that all government is contingent; if you want to change your circumstances, then you get moving. Sure, as long as the handouts and freebies are available, then everyone will line up to get "their fair share" of the freebies. But when the freebies disappear, then life goes on, and those with the drive and perseverence to get here will probably manage to do alright for themselves and their families.

As a nation populated by recent immigrants (and 100 years is nothing in old cultures like India, China and Russia), the U.S. has certain (by no means unique) advantages just in terms of brutally non-politically-correct natural selection.

3. Religion plays a unique and powerful role in the U.S. in ways which it did not in the USSR. A quick glance at Russian art suggests the central role of the Church in Russian culture. But if Orlov were African-American, I believe his dismissal of religion might not have been so quick and assured.Rather than the non-factor Orlov expects, I would reckon religious institutions will play critical roles in organizing people for their own betterment. People didn't come here to ignore their religion, they came here to practice it, and that goes for every religion. It's been said that the black church is the only institution owned lock, stock and barrel by the African-American community, and it will not be a non-factor in that community but a central institution of stability, hope and communal services.

I lived in central Detroit in the summer of 1968 as one of two Caucasian families in about 4 square miles, and I did not see churches reduced to non-factors. I wouldn't underestimate the role of churches, temples, mosques and synagogues in the coming era of turmoil, but would instead expect their influence to grow along with their roles in the community. Churches are populated with imperfect human beings, so they are of course imperfect as well. But when push comes to shove, many Americans will turn to their church for more than weddings and occasional spiritual solace.

4. Wandering around as a homeless migrant is not a good survival strategy. Orlov suggests at the end of his book that wandering between two or three sources of resources would be a good strategy. My own view is that freeloading is frowned upon in the U.S. and your best bet to is either stay put (yes, even in ghettos and urban neighborhoods) or move to a place where you have some roots (where you grew up is always a good place to start) or where there is some commonality: a church you belong to, an ecosystem you love and will nurture, etc.

I also think the value of hard work and generosity is still valued here in the U.S. If you pitch in and start growing some food, and then share it, you will quickly become a valued member of the community, and people will start looking out for you, too.

Wandering around freeloading is a good way to be scorned and loathed. Even in the grittiest neighborhoods, food can be grown in amazing abundance once people put their minds and backs to it.

5. The U.S. is on par with Sadr City, Iraq in terms of firepower in the hands of citizens. As the most heavily armed society in the developed world, the U.S. can easily go the way of well-armed criminal gangs controlling urban zones or well-armed militia sprouting up to take out the criminals. There is historical precedents for either scenario. A third scenario (common in the 3rd World) is for wealthy enclaves to hire private forces to protect the enclave.

While I can't predict which will play out in various circumstances, we should be aware that the U.S. has millions of military veterans and millions of weapons. The USSR had the vets but not the weapons in private hands. People will eventually choose to support an alternative to anarchy or criminal/mob rule, unless the criminal gang is the only alternative to something worse (i.e. the Sadr City scenario). Or people will pay extra to maintain a top-notch police force and let go of the other city services, performing them communally via volunteer labor.

My point is simply that a heavily armed culture with tens of millions of firearm-trained vets is not going to follow the route of a society without those two elements.

6. Orlov underestimates the power of the Web/Internet. Orlov is extending his experience in a pre-Internet Russia, in which you had to stand outside in the cold in order to hitch a ride. Assuming the Internet backbone will be maintained--and why wouldn't it be placed ahead of every other use except hospitals and the public safety centers?--then virtually everyone will be able to arrange barters of almost unimaginable range via the Web.I need a ride to San Jose and have a bag of fresh lettuce and green beans to trade, etc. It doesn't take much imagination to see how the Web will be leveraged to arrange trade, barter, etc.

7. Cable TV. Orlov does mention the mind-rot induced by the U.S. mass media, but he underestimates the perniciousness of cable TV. As long as Americans turn to the entertainment industry (CNBC et al.) for their "information," then the U.S. is well and truly doomed. Our only hope is that most Americans will soon be too impoverished to pay their cable/Dish bill and be cut off, forcing them to the Web where some glimmers of reality do poke through the med-enhanced, propaganda-induced haze.

These are a few points I saw, and undoubtedly I missed some others. Nonetheless it's a worthy exercise to read his work and make your own analysis.

Tuesday, June 24, 2008

Under the Hood of Jim Kunstler's World Made by Hand

This week's theme: Survival +

OK, so it's a poor stab at humor to use the "let's look under the hood" analogy for a novel set in a post-oil small town in the U.S., but how fast would you have clicked away if I'd used the phrase "meta-analysis"?

A meta-analysis is either an analysis of many previous analyses, or an analysis of what's happening under the hood of a narrative, i.e. not the plot, characters, setting, conflict, dialog, etc., which are the elements of a story, but what powers the whole enterprise: the world-view, or the assumptions the story is built upon.

What's striking about author James Howard Kunstler's World Made by Hand: A Novel is what's not happening. Like Sherlock Holmes' observation about the dog barking--what struck him as remarkable was that the dog didn't bark--the interesting question is: what isn't in the book?

Some of the survivalist/post-oil-crash material out there assumes a precipitous collapse which can only be survived by duct-taping extra M-16 ammo clips to your calves (remember to shave your legs, or it will hurt like the dickens when you yank those clips free) and mowing down in Rambo-like fashion the crazed-by-hunger wild mobs of doomed urbanites who will be assulting your bunker in "Banzai" suicide charges.

Another assumption is that a setup akin to the mythical but amusing Mogambo Guru's Bunker will enable you and your family to live through the initial collapse and chaos--let's guesstimate six months, shall we?--at which point you emerge... and then the assumptions get murky.

If the world we know is toast, and you've been holed up for months picking off urban stragglers with your vast collection of weaponry (better hope none of those desperate souls manages to get a hold of some dynamite or RPGs or any other stuff which could be used to extricate a tunnel rat or bunker dweller--heck, even sealing the ventilation pipes would work in a pinch), then what will you eat when you emerge? Everything's been scavanged/consumed by the locust-like urban hordes before they passed away in their teeming millions.

Did you have a patch of ground to till during the collapse? Then you were easy pickings for one of the heavily-armed hungry ex-soldiers with a rifle and a scope. Or someone you'd come to trust will blow you away because you've got a generator and other good stuff. If it comes to that, a bunker just isn't much protection; in fact, all those goodies and the meta-message that you have something worth protecting make it a high-value, high-interest target.

(If you've ever hunted goats or equivalent with a bow, then nailing a big human with a rifle and scope will seem like child's play, even from hundreds of yards away.)

Kunstler's vision is more realistic: the oil-dependent world ends not with a bang but with a whimper. Transportation degrades, stuff stops working, repairs stop being made, and so on. In other words, life goes on during the decline. Yes, there was a nasty pandemic in the book, and it references a nuclear terrorist attack, but the world-view is one of decline, not a world-ending 1000-weapon nuclear strike many of us feared during the Cold War.

Kunstler also side-steps events such as global-warming triggered inundation of coastal cities and other more apocolyptic scenarios, I suspect partly because this has limited dramatic possibility--water rises, everyone leaves or dies, end of story--and partly because what interests him is how people make do.

As discussed in yesterday's post on the 13th century, humans have suffered true catastrophes in recorded history--starvation, cannibalism, pandemics, invasion by ruthless conquering hordes who raped/carried off the women and killed the men like they were insects, and so on.

(For evidence of this, we turn to National Geographic's report that 8% of the men in Eurasia carry Ghengis Khan's genes: Genghis Khan a Prolific Lover, DNA Data Implies. It is safe to assume not all of those hundreds of women he took into his tent were willing.)

According to historian David Hackett Fischer, parts of rural Britain did not return to the population density of the mid-13th century until the 1950s. That's how thoroughly the Midieval population was decimated by the Black Plague, crop failures, war, etc.

So Kunstler's point of view is the one history suggests is likely. Most people survive even apocalyptic pandemics and wars, and then get on with making do.

And how do they make do? In groups. In times of duress and turmoil, our instinct--and it encapsulates millions of years of adaptive survival--is not to borrow into the ground alone, but to seek out others with whom we can form a larger, far more adaptable, far sturdier and stronger survival mechanism: a group which through trust and shared goals can work together for the good of all individuals in the group.

Have you ever built a house by yourself? I've done quite a bit of various structures by myself, and it's lonely and dispiriting at times because the work proceeds so slowly. At certain junctures, even a child or an elderly soul or a person in a wheelchair would boost productivity. It doesn't take much to get a lot done when people work together.

Recall that humans are 1/3 chimpanzee, 1/3 bonobo and 13/ orangutan. In other words, we are a mix of quite different social structures and survival mechanisms. The orangutan is largely solitary, the chimps are highly hierarchical and completely social, while the bonobo are highly social but much less hierarchical; they use sex and touching to establish bonds of trust and communication.

Under the hood, Kunstler's book is securely grounded in this reality: post-oil, people will band together along various lines. You need look no farther than a schoolyard or prison to see how a stressful, potentially dangerous setting leads people to join various "protective" groupings. Why would the post-oil world be any different from the world we have inhabited in past calamities?The groups in the book display certain characteristics common to humans in all eras; some groups are organized around a charismatic religious figure or religious faith, others are military-chimplike in their domination by an alpha-male, and others are more bonobo-like, in a "let's just try to get along" way. The appeal of each organization is communicated evenly; the book doesn't rank any one above the others.

And as with all human communities, the groups jockey for resources and alliances, uneasy, temporary, or enduring, as the case may be. People fall in love, seek the comfort of sex (bonobo-like behaviors) ands have affairs/illicit relationships, and some consider switching alliances.Lastly, production of excess goods and trade are the key to improving one's lot. One of the more astonishing truths in recorded history is how trade springs up between centers of excess production, even over great distances and despite what we would consider primitive technology (small sailing ships, caravans, etc.)

Rome, China and India all exchanged goods before the Christian era; the rise of Islam in the Mediterranean region led to Arab traders faciliating trade between India and Renaissance Venice and other great Italian city-states.

Thus it seems entirely accurate to have the wealthy landholder set as the trader for the region; he has the excess production to trade with, and he has sought out the trade routes which enable him to trade his low-value excess goods (low value in the sense they are above and beyond what local demand can consume) for high-value goods which are excess goods in some other region.This cycle of enrichment via trade is as old as civilization.

Those are a few of the moving parts I see under the hood of World Made by Hand . I'm sure I missed many others of importance, which is the ultimate value of fiction: it reflects the reader as much as the author.

Monday, June 23, 2008

Human history is not just a chaotic cacophony; if we pay attention, we observe rhythms and structures. The reason is as obvious as it is profound. Like all species of life on earth, humanity has been structured/selected via complex adaptations to survive and reproduce within various ecological niches. That our social structures and our histories share certain characteristics over historical time is common-sense.

History, like an individual, is unique even as it shares characteristics with previous eras. Without studying history, we are prone to both arrogance and insecurity. Unaware of the past, we proudly reckon we've gone beyond the reach of cyclical history; and then, when the cycle turns and we are adrift and fearful, then we feel inadequate to the task of righting the sinking ship.History properly studied renders us humble about our ability to control nature and events, and confident that we too can survive bad times.

In Fischer's well-documented view, there is a grand cycle of prices and wages which turn on the simple but profound law of supply and demand; all else is detail.As a people prosper and multiply, the demand for goods like food and energy outstrips supply, causing eras of rising prices. Long periods of stable prices (supply increases along with demand) beget rising wages and widespread prosperity. Once population and financial demand outstrip supply of food and energy--a situation often triggered by a series of catastrophically poor harvests--then the stability decays into instability as shortages develop and prices spike.These junctures of great poverty, insecurity and unrest set the stage for wars, revolutions and pandemics.

It is remarkable indeed that the very conditions so troubling us now were also present in the price rises of the 13th, 16th and 18th centuries. Unfortunately, those cycles did not have Disney endings: the turmoil of the 13th century brought war and a series of plagues which killed 40% of Europe's population; the 16th century's era of rising prices tilled fertile ground for war, and the 18th century's violent revolutions and resultant wars can be traced directly to the unrest caused by spiking prices.

(The very day that prices for bread reached their peak in Paris, an angry mob tore down the Bastille prison, launching the French Revolution.)

After a gloriously long run of stable prices in the 19th century--prices were essentially unchanged in Britain between 1820 and 1900--The 20th century was one of steadily increasing prices. Fischer takes great pains to demolish the ideologically appealing notion that all inflation is monentary; the supply of money (gold and silver) rose spectacularly in the 19th century but prices barely budged. In a similar fashion, eras of rising prices have seen stable money supplies. Yes, monentary expansion can play a part, but Fischer has done his homework, and population growth is a far stronger correlation than money supply.

Monentary inflation can lead to hyper-inflation, of course, but there are always mitigating factors in those circumstances. The long wave is not one of hyper-inflation but of supply and demand imbalances undoing the social order.

Americans are inherently suspicious of anything which seems to threaten constraint of the American Will or Dream; thus it is not surprising that cycles of history are largely unknown in the U.S. As Fischer explains:

This collective amnesia is partly the consequence of an attitude widely shared among decision-makers in America, that history is more or less irrelevant to the urgent problems before them.

Fischer notes that he describes not cycles but waves, which are more variable and less predictable. (Surfers know to count waves, as they tend to arrive in sets.)

Is the sudden rise in the price of oil unique? Not at all. Energy in 1300 was firewood, and as Fischer relates, the cost of energy skyrocketed then, too:

In England from 1261 to 1320, the price of firewood and charcoal rose faster and farther than any other commodity. Close behind the soaring cost of energy came price-rises for food-stuffs of various kinds--particluarly for grain, meat and dairy products.

Talk about being ripped from the headlines: this describes our current situation remarkably well.In response to this great rise in prices of essentials, both commoners and governments debased the currency. In their day, this meant shaving the edges of coins, or debasing new coins with non-precious metals. The debasement was an attempt to increase money to counteract the rise in prices, but it failed (of course). Every few decades, a new undebased coinage was released, and then the cycle of debasement began anew.

Just as insidiously, wages fell:But as inflation continued in the mid-13th century, money wages began to lag behind. By the late 13th and early 14th centuries real wages were dropping at a rapid rate. Hmm--sound familar?

Now guess what happened next:At the same time that wages fell, rents and interest rose sharply. Returns to landowners generally kept pace with inflation or exceeded it.

This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the late stages of every long inflation.

And what happened to government expenditures? It's deja vu all over again--deficits:Yet another set of cultural responses toinflation created disparities of a different kind: fiscal imbalances between public income and expenditures. Governments fell deep into debt during the middle and later years of the 13th century. Oh, and crime and illegitimacy also rose. Fischer summarizes the end-game of the price-rise wave thusly:

In the late 13th century, the medieval price-revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged ever higher. The economy of Western Europe became dangerously vulnerable to stresses it might have managed more easily in other eras.

And there you have our future, writ large in the 13th, 16th and 18th century price-revolution waves which preceded ours. It is hubris in the extreme to think we have somehow morphed into some new kind of humanity far different from those people who tore down the Bastille in a great frustrated rage at prices for energy and bread they could no longer afford.

It is foolish to blame "speculators" for the rise in food and energy, when the human population has doubled in 40 years and the consumption of energy and food has exploded as a result. Yes, technology in the form of the Green Revolution enabled vastly greater yields per acre; and yields in many places can still be increased with fertilizers, improved seeds and so on.

But all of this was the result of cheap, easy-to-pump, readily available oil. All the miracles resulted from cheap oil, and now that it's gone--yes, yes, there is more, but it's not cheap or easy to pump--then we have to replace it with some other energy source.

But petroleum and natural gas are wonderfully adaptable energy sources, handy for making fertilizer, plastics, and other chemicals as well as for fuel. Both are readily stored and possess very high energy densities. Yes, Lithium-ion batteries also have a high energy density, but it isn't a matter of drilling a hole and complex lithium-ion batteries gush out. It takes tremendous energy and technology to fashion lithium-ion batteries, and as a result they're expensive.

If the market responds to the oil price-revolution with sufficient verve, capital and innovation, perhaps a rich brew of petroleum replacements will appear in mass production. But there is a peculiar feedback loop at work; there has to be enough energy on hand to build this new infrastructure of solar-cell factories, algae-to-biofuel plants and all the rest. If we consume all the cheap oil in a vain attempt to maintain the status quo, then the replacement becomes ever more costly. And then we have a price-revolution on our hands which looks eerily like the ones which swept Europe in the 13th, 16th and 18th centuries.

So where does this leave us? In Dude, We Are So Doomed, I noted the intersection of four long-term cycles (waves), which suggest that the era from the present (2008) to 2021 will be troubled indeed, and may result in a war, revolution or equivalent re-ordering of U.S. society and perhaps the world.

It doesn't take much thought to anticipate the post-cheap-petroleum era might be fraught with risk and turmoil as the transition--messy and unpredictable in some ways, but predictably messy in any event--takes place. Based on the history so painstakingly asembled by Fischer, we can anticipate:

Ever higher prices for what I call the FEW Essentials: food, energy and water.Ever larger government deficits which end in bankruptcy/repudiation of debts/new issue of currency.Rising property/violent crime and illegitimacy.Rising interest rates (by a lot, not a little).Rising income inequality in favor of capital over labor.Continued debasement of the currency.Rising volatility of prices.Rising political unrest and turmoil (see "Revolution").

Food Shortages, Rising Prices, Stagnant Wages: Welcome to the 13th CenturyThis week's theme: Survival + June 23, 2008 Human history is not just a chaotic cacophony; if we pay attention, we observe rhythms and structures. The reason is as obvious as it is profound. Like all species of life on earth, humanity has been structured/selected via complex adaptations to survive and reproduce within various ecological niches. That our social structures and our histories share certain characteristics over historical time is common-sense.History, like an individual, is unique even as it shares characteristics with previous eras. Without studying history, we are prone to both arrogance and insecurity. Unaware of the past, we proudly reckon we've gone beyond the reach of cyclical history; and then, when the cycle turns and we are adrift and fearful, then we feel inadequate to the task of righting the sinking ship.History properly studied renders us humble about our ability to control nature and events, and confident that we too can survive bad times.Which brings me once again to The Great Wave: Price Revolutions and the Rhythm of History by historian David Hackett Fischer (recommended by reader Cheryl A., who kindly sent me a copy of the book.)In Fischer's well-documented view, there is a grand cycle of prices and wages which turn on the simple but profound law of supply and demand; all else is detail.As a people prosper and multiply, the demand for goods like food and energy outstrips supply, causing eras of rising prices. Long periods of stable prices (supply increases along with demand) beget rising wages and widespread prosperity. Once population and financial demand outstrip supply of food and energy--a situation often triggered by a series of catastrophically poor harvests--then the stability decays into instability as shortages develop and prices spike.These junctures of great poverty, insecurity and unrest set the stage for wars, revolutions and pandemics.It is remarkable indeed that the very conditions so troubling us now were also present in the price rises of the 13th, 16th and 18th centuries. Unfortunately, those cycles did not have Disney endings: the turmoil of the 13th century brought war and a series of plagues which killed 40% of Europe's population; the 16th century's era of rising prices tilled fertile ground for war, and the 18th century's violent revolutions and resultant wars can be traced directly to the unrest caused by spiking prices.(The very day that prices for bread reached their peak in Paris, an angry mob tore down the Bastille prison, launching the French Revolution.)After a gloriously long run of stable prices in the 19th century--prices were essentially unchanged in Britain between 1820 and 1900--The 20th century was one of steadily increasing prices. Fischer takes great pains to demolish the ideologically appealing notion that all inflation is monentary; the supply of money (gold and silver) rose spectacularly in the 19th century but prices barely budged. In a similar fashion, eras of rising prices have seen stable money supplies. Yes, monentary expansion can play a part, but Fischer has done his homework, and population growth is a far stronger correlation than money supply.Monentary inflation can lead to hyper-inflation, of course, but there are always mitigating factors in those circumstances. The long wave is not one of hyper-inflation but of supply and demand imbalances undoing the social order.Americans are inherently suspicious of anything which seems to threaten constraint of the American Will or Dream; thus it is not surprising that cycles of history are largely unknown in the U.S. As Fischer explains:This collective amnesia is partly the consequence of an attitude widely shared among decision-makers in America, that history is more or less irrelevant to the urgent problems before them. Fischer notes that he describes not cycles but waves, which are more variable and less predictable. (Surfers know to count waves, as they tend to arrive in sets.)Is the sudden rise in the price of oil unique? Not at all. Energy in 1300 was firewood, and as Fischer relates, the cost of energy skyrocketed then, too:In England from 1261 to 1320, the price of firewood and charcoal rose faster and farther than any other commodity. Close behind the soaring cost of energy came price-rises for food-stuffs of various kinds--particluarly for grain, meat and dairy products. Talk about being ripped from the headlines: this describes our current situation remarkably well.In response to this great rise in prices of essentials, both commoners and governments debased the currency. In their day, this meant shaving the edges of coins, or debasing new coins with non-precious metals. The debasement was an attempt to increase money to counteract the rise in prices, but it failed (of course). Every few decades, a new undebased coinage was released, and then the cycle of debasement began anew.Just as insidiously, wages fell:But as inflation continued in the mid-13th century, money wages began to lag behind. By the late 13th and early 14th centuries real wages were dropping at a rapid rate. Hmm--sound familar? Now guess what happened next:At the same time that wages fell, rents and interest rose sharply. Returns to landowners generally kept pace with inflation or exceeded it.This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the late stages of every long inflation. And what happened to government expenditures? It's deja vu all over again--deficits:Yet another set of cultural responses toinflation created disparities of a different kind: fiscal imbalances between public income and expenditures. Governments fell deep into debt during the middle and later years of the 13th century. Oh, and crime and illegitimacy also rose. Fischer summarizes the end-game of the price-rise wave thusly:In the late 13th century, the medieval price-revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged ever higher. The economy of Western Europe became dangerously vulnerable to stresses it might have managed more easily in other eras. And there you have our future, writ large in the 13th, 16th and 18th century price-revolution waves which preceded ours. It is hubris in the extreme to think we have somehow morphed into some new kind of humanity far different from those people who tore down the Bastille in a great frustrated rage at prices for energy and bread they could no longer afford.It is foolish to blame "speculators" for the rise in food and energy, when the human population has doubled in 40 years and the consumption of energy and food has exploded as a result. Yes, technology in the form of the Green Revolution enabled vastly greater yields per acre; and yields in many places can still be increased with fertilizers, improved seeds and so on.But all of this was the result of cheap, easy-to-pump, readily available oil. All the miracles resulted from cheap oil, and now that it's gone--yes, yes, there is more, but it's not cheap or easy to pump--then we have to replace it with some other energy source.But petroleum and natural gas are wonderfully adaptable energy sources, handy for making fertilizer, plastics, and other chemicals as well as for fuel. Both are readily stored and possess very high energy densities. Yes, Lithium-ion batteries also have a high energy density, but it isn't a matter of drilling a hole and complex lithium-ion batteries gush out. It takes tremendous energy and technology to fashion lithium-ion batteries, and as a result they're expensive.If the market responds to the oil price-revolution with sufficient verve, capital and innovation, perhaps a rich brew of petroleum replacements will appear in mass production. But there is a peculiar feedback loop at work; there has to be enough energy on hand to build this new infrastructure of solar-cell factories, algae-to-biofuel plants and all the rest. If we consume all the cheap oil in a vain attempt to maintain the status quo, then the replacement becomes ever more costly. And then we have a price-revolution on our hands which looks eerily like the ones which swept Europe in the 13th, 16th and 18th centuries.So where does this leave us? In Dude, We Are So Doomed, I noted the intersection of four long-term cycles (waves), which suggest that the era from the present (2008) to 2021 will be troubled indeed, and may result in a war, revolution or equivalent re-ordering of U.S. society and perhaps the world.It doesn't take much thought to anticipate the post-cheap-petroleum era might be fraught with risk and turmoil as the transition--messy and unpredictable in some ways, but predictably messy in any event--takes place. Based on the history so painstakingly asembled by Fischer, we can anticipate:Ever higher prices for what I call the FEW Essentials: food, energy and water.Ever larger government deficits which end in bankruptcy/repudiation of debts/new issue of currency.Rising property/violent crime and illegitimacy.Rising interest rates (by a lot, not a little).Rising income inequality in favor of capital over labor.Continued debasement of the currency.Rising volatility of prices.Rising political unrest and turmoil (see "Revolution").We'll continue examining these all-important issues in this "Survival +" themed week. Survival + what? We shall see....These two Readers Journal essays are extremely relevant to this week's theme of Survival + ( read them all, of course):The Power of Eight and Three (Reinventing our Native Cuisine) (Noah Cicero, June 23, 2008)The Principles of Trading Also Apply to Life (Harun I., June 19, 2008)New commentaries on diet/lifestyle and Something Amiss added:Readers Journal commentaries week of June 20, 2008 Electric vehicles, long-wave cycles pointing to World War III, bikeways to L.A., Chinese goods and competition, something amiss, diet/lifestyle and more.

Thank you, Nellie D. ($40), for your outrageously generous donation to this site, and for your written note of encouragement. I am greatly honored by your on-going support and readership.

Saturday, June 21, 2008

Did You Get This Spam, Too?

It's amusing to actually read some of these far-fetched spam emails you get asking for money to secure a fortune. I highly recommend reading this one (really):

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Friday, June 20, 2008

Welcome to Sadr City, U.S.A.

One of the more pernicious side-effects of spiraling healthcare costs is the weight they're adding to U.S. city, county and municipal agency budgets just as revenues are plummeting and fuel/input costs are skyrocketing.

Every city, university, transit agency, school district and local government entity which has promised public union employees (labor and labor overhead is typically about 75% of their budgets) full healthcare insurance and plummy pensions in "good times" is now facing the unhappy fact that these labor benefits are completely unaffordable in an era of falling revenues and shrinking pension fund earnings.

With revenues plummeting from all sources--state and Federal grants, property taxes, building permit fees, real estate transaction fees, sales taxes, business taxes based on gross receipts, fees and on and on--the unsustainability of the promised benefits is starkly revealed.

Adding to the burden is the decline in pension fund returns, which then force the city or agency to ante up more of the pension costs out of current revenues. And with many municipal pensions bloated to levels private sector workers can only fantasize about--80% pay after 20 years, a pension "earned" after only seven years of service, even if you're only part-time, etc.--then the pension-fund deficit is like a fiscal monster eating unprepared local government budgets alive.Adding to the burden is a bloated payroll which has grown like Topsy in the past decade. If you comb your local city or county budget, you'll very likely find that the payroll "headcount" has expanded considerably since 2000.

Now like every other human being with "entitlements," these employees have a strong sense of, well, entitlement. If the City of Vallejo is any guide, the public unions will grudgingly offer modest snips here and there as expenses are rising by 10% or more and revenues are falling like granite boulders tossed off a cliff.

The first ball has yet to be pitched in the first inning of the recession, so various budget tricks are sufficing for many cities and agencies: dumping spending into the next fiscal year (amazing what miracles can be had by shifting spending a mere week), selling bonds based on future lottery revenues (the latest lunacy here in California), purposely understating expenses and overstating revenues, etc. etc.

But as the ballgame gets under way in earnest, the tricks and smoke-and-mirrors will no long suffice--huge tax increases will be proposed, or huge cuts in payroll will be made, or the city/agency will declare bankruptcy and let the judge void all the unsustainable labor contracts and start over with what actually matches revenues.

Unhappily for the employees and managers, cities and counties can't just print money; they have to live within their revenue or sell "infrastructure" capital improvement bonds.

With housing values dropping, unemployment rising, healthcare premiums and co-pays climbing, and "junk fees" shooting up like rockets--you know, the fee to go to a park, the parking ticket that's now $45, the fishing license that doubled in price, and so on, ad nauseum--taxpayers are in no mood to grant government's wish for huge tax increases so they can cover every employees' family (you really have 12 kids, or are those your siblings' kids you're insuring for "free"?) and fund a pension for everyone who worked 6 or 7 years and then bailed.

As I have suggested here before, pension funds' nifty returns during the past decade were based on the same financial sector flim-flammery which is now blowing up. Real estate is tanking and the stock market won't be far behind. Bonds are supposedly "safe" because "the Fed will keep interest rates low forever," but unfortunately the market sets rates in the real world and rates are rising, making all current bonds in pension fund portfolios about as valuable as 3-day old fish that's been left to "age" in the summer sun.

Corn futures are doing just dandy right now but most pension funds aren't allowed to "speculate" in futures or short the market; and so there really isn't much they can invest in that isn't losing value.

In other words, Pandora's Box has been opened and the contents aren't crowd pleasers. As noted here yesterday, healthcare premiums are rising 10% a year, year over year, and with the financial sector blowing up and the economy tanking, you can forget the fat pension-fund returns--now we have to fund those pensions out of cash revenues even as those revenues shrivel like a lettuce leaf in Death Valley.

While sales receipts of gasoline are rising (due to skyrocketing prices), the sales of everything else is dropping, slashing tax receipts at every level and of every kind. Small businesses and franchises are vanishing like card tables in a hurricane, and they're taking their receipts and taxes with them.

Which brings us to Sadr City (formerly Saddam City/Al Thawra) , the sprawling, notoriously crowded slum in Baghdad, Iraq. As you can see from this satellite photo (courtesy of www.globalsecurity.org), Sadr City is a nicely geometric slum not far from the heavily fortified, clean, well-lighted and well-fed enclave of the U.S.A., The Green Zone. (Such a pleasant sounding name in a desert, eh? I doubt that Orwell could have done any better.)

With absolutely no pleasure, since I live in a city heading for massive cuts or insolvency, I submit Sadr City is a model of sorts for American cities: a slum with few government services run by religious and/or paramilitary organizations.

Meanwhile, a short distance away, the wealthy enclave has erected walls or barriers (visible or not, they're there) and hired a private militia (Hi, I'm your friendly Blackwater "Neighborhood Watch" guy) to keep the rabble and stench safely at a distance.

This is nothing new, of course; the wretched, overcrowded Paris slums of 1877 so accurately described by Emile Zola in L'Assommoir did not adjoin the ritzy part of town, to be sure. And the "Green Zone" enclave for the well-heeled is standard urban planning in Third World mega-cities. (See Planet of Slums by Mike Davis for more on mega-slums.)

It was a lot more fun being a politician back in the good old days before 2008 when revenues were rising and you could bring smiles to faces with increases in benefits, add more people to the payroll and provide more services to citizens; the future won't be quite so joyful for those tasked with balancing an impossibly skewed and broken budget.

As always, everyone won't believe that the gravy train is now a smoking pile of rubble by the tracks; there has to be more money somewhere, just go get it! But there won't be any more money, they'll be less, and less next year and even less the year after that, for quite some time.

Trash pickup will slip in frequency, and perhaps angry strikes will disrupt service entirely. Taxpayers will have their own well of anger, for many of them will be jobless or benefitless or living off a part-time job or reduced hours. They will not be in any mood to sympathize with angry public employees. There will be enough anger and frustration for everyone to get a nice big helping, but not enough money or solutions except the hard kind that nobody wants to hear.

As I have noted here before, the foundation of local taxes is small business, and small business is exactly who can't afford the taxes already being levied. They will fold up and leave empty warehouses and retail spaces rather than lose money. Even the big chains are closing stores by the dozens--in my neighborhood, Ross, Sees Candy and Barnes and Noble, to name but a few.

If anyone working for a city or agency thinks this trend will reverse any day now, they will be very disappointed by the gathering momentum of businesses shuttering and tax revenues dropping year after year after year. "You can't get blood from a turnip," the old saying goes, and the citizen without a job is a turnip, and a small business losing money is a turnip, too. Even people with jobs but no more commissions or benefits are turnips. They have enough money for rent and food and gas or subway fare, and nothing else.

The city can pick up the sales tax on gasoline and a few non-food items at the supermarket, and a few bucks' tax on cellphone charges, but that's all it will get. The more the city charges for access to pools and parks and services which were once free to taxpayers, the less such services will be used. After all, You can't get blood from a turnip.

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